PCAOB Issues Preview of Observations From 2016 Inspections of Auditors of Issuers

On November 10, the PCAOB published a Staff Inspection Brief that highlights frequent audit deficiencies identified by their Division of Registration and Inspections during the 2016 inspection cycle. The release is designed to help registered public accounting firms comply with PCAOB Auditing Standards. However, we believe it also provides preparers and issuers an opportunity to plan and prepare for accounting, reporting and disclosure areas likely to receive extra scrutiny by their auditors in their upcoming audits.

Protiviti issued a Flash Report last week, which highlights some of the most notable areas of deficiency that the PCAOB underscored in its brief. They include:

Risks of material misstatement – The PCAOB is urging auditors to assess areas of risk of material misstatement for each significant account and disclosure. Issuers likely will be asked by their auditors for more detailed supporting documentation in these high-profile areas. Based on the PCAOB’s guidance, auditors are being asked to presume that fraud risk surrounding revenue recognition is generally inherent. Management should design effective controls to mitigate the risks of fraud. The board also stresses the importance of evaluating whether financial statements are presented fairly, and whether the information needed to achieve that fairness is contained in the statements; however, the responsibility of proper financial statement presentation ultimately lies with management.

Internal control over financial reporting – The board is emphasizing the importance of testing controls more deeply and more broadly. Examples include testing the completeness and accuracy of system-generated data used in financial reporting and testing management’s cash flow projections used to support valuations and revenue transactions, among others. Issuers and preparers should anticipate greater scrutiny by their auditors over these areas.

Accounting estimates – Auditors will be paying attention to and testing the methodologies and assumptions used by management in the areas of revenue estimation, allowance for loan and lease losses, inventory reserves, and financial instruments, among others. Of course, issuers and preparers should keep in mind that these accounting estimates will likely warrant additional audit focus.

Finally, as in the past, the PCAOB will be focusing on the performance of audit committees and external audit firms and their compliance with the goal of ensuring greater audit quality.

In addition to preparing for the new areas of emphasis, it is important for preparers and issuers to concentrate on areas identified for extra scrutiny in past PCAOB briefs. We summarized these areas in a previously issued Flash Report, which you can find here.